*840 Since the death of the petitioner's sole stockholder on June 19, 1929, all of the petitioner's outstanding capital stock has been held in trust under the will of its former owner. The trustee was desirous of liquidating petitioner, but found it impracticable to do so because of the nature of its assets. Held, the corporation was not availed of during 1931 "for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed", and the petitioner is not subject to tax under section 104 of the Revenue Act of 1928 upon its net income for 1931.
*1165 The respondent has found a deficiency in petitioner's income tax for 1931 in the amount of $19,788.45. The deficiency is due to respondent's determination that the petitioner is subject to tax under section 104 of the Revenue Act of 1928.
FINDINGS OF FACT.
1. Petitioner corporation was organized in 1921 under the laws of the State of Delaware, with an authorized capital of 100 shares of*841 no par value common stock. The entire authorized stock of 100 shares (except for two qualifying shares) was issued to A. H. Burroughs in exchange for assets and liabilities set up on petitioner's books as follows:
| ASSETS | |
| Notes receivable | $273,914.98 |
| Accounts receivable - A. H. Burroughs | 114,755.97 |
| Total assets | 388,670.95 |
| LIABILITIES AND CAPITAL | |
| Special purchase money notes | 187,500.00 |
| Interest payable | 193,103.26 |
| Capital stock | 8,067.69 |
| Total liabilities and capital | 388,670.95 |
2. On May 29, 1924, petitioner's charter was amended so as to increase its authorized capital stock to 200 shares of no par value common stock.
*1166 3. On June 5, 1924, petitioner issued 50 shares of additional stock to A. H. Burroughs in payment of the purchase money notes of $187,500 mentioned in paragraph 1 hereof.
4. On December 9, 1924, petitioner issued an additional 25 shares of its stock to A. H. Burroughs in exchange for certain securities owned by him.
5. A. H. Burroughs died on June 19, 1929. Since that date the 175 shares of outstanding stock of petitioner have at all times been held by the City Bank Farmers Trust Co. of New York City, as executor*842 and trustee of the estate of A. H. Burroughs, deceased.
6. Petitioner's net income for Federal taxation purposes and the Federal income taxes paid for each of the years 1921 to 1931 are as follows:
| Year | Net income | Taxes paid |
| 1921 | $16,557.18 | $3,896.01 |
| 1922 | 10,052.50 | 1,006.66 |
| 1923 | 22,978.19 | 2,622.27 |
| 1924 | 28,626.43 | 3,578.30 |
| 1925 | 54,567.55 | 4,153.96 |
| 1926 | 51,908.45 | 4,185.60 |
| 1927 | $26,918.77 | $2,990.89 |
| 1928 | 31,541.22 | 3,604.41 |
| 1929 | 18,683.54 | 1,092.84 |
| 1930 | 27,572.00 | 2,031.23 |
| 1931 | 39,576.89 | 4,609.49 |
7. No dividends were declared or paid by petitioner during any of the years 1921 to the present date except as follows: July 1, 1926, $48,700; and December 5, 1927, $27,700.
8. Petitioner's assets and liabilities as of December 31, 1930, and December 31, 1921, consisted of the following:
| December 31, 1930 | December 31, 1931 | |
| Assets: | ||
| Cash | $3,333.36 | $18,937.51 |
| Accounts receivable - A. H. Burroughs | 130,235.10 | 130,235.10 |
| Securities | 211,051.90 | 176,434.05 |
| Loans estate of A. H. Burroughs | 153,000.00 | 200,500.00 |
| Timber lands | 40,000.00 | 40,000.00 |
| Total | 537,620.36 | 566,106.66 |
| Liabilities | None | None |
*843 9. The items designated "Accounts receivable - A. H. Burroughs $130,235.10" appearing in paragraph 8 above represents the net borrowings of Burroughs from petitioner corporation over the years 1925 to date of his death, June 19, 1929.
10. The items designated "Loans estate of A. H. Burroughs" in the amounts of $153,000 at December 31, 1930, and $200,500 at December 31, 1931, represent loans from petitioner corporation to the executors of the estate of A. H. Burroughs, itemized as follows:
| December 18, 1930 | $130,000 | |
| December 28, 1930 | 23,000 | |
| Total loans for 1930 | 153,000 | |
| November 19, 1931 | $15,000 | |
| December 1, 1931 | 20,000 | |
| December 19, 1931 | 5,000 | |
| December 23, 1931 | 7,500 | |
| Total loans for 1931 | 47,500 | |
| Total loans to December | ||
| 31, 1931 | 200,500 |
*1167 During the year 1932 petitioner made further loans to executors of the estate of A. H. Burroughs, itemized as follows:
| January 11, 1932 | $7,500 |
| March 3, 1932 | 32,000 |
| Total loans for 1932 | 39,500 |
11. The loans to the executors of the estate of A. H. Burroughs, in the aggregate amount of $240,000 at December 31, 1932, were used to pay state and Federal estate and*844 inheritance taxes of the estate.
12. No interest was charged or paid to the petitioner on the loans referred to in paragraphs 9 and 10 above. No part of those loans has been repaid. The loans were made without collateral and without any evidence of indebtedness other than the entries of the items on petitioner's records.
13. No part of the net income of the petitioner for the taxable year 1931 has been reported or included in the gross income of the shareholders of petitioner for that year, as provided in section 104(d) of the Revenue Act of 1928.
14. The Commissioner determined a liability for 1931 against this petitioner under the provisions of section 104 of the Revenue Act of 1928.
15. A. H. Burroughs appointed the Farmers Loan & Trust Co., of New York City, now by change of name known as the City Bank Farmers Trust Co., as executor of and trustee under his last will and testament, so that the affairs of the petitioner since the death of Burroughs in 1929 have been and are now being administered by the Trust Co.
16. The shares of stock of the petitioner held by the executor were appraised in the proceeding to fix the New York State transfer tax as of June 19, 1929, the*845 date of Burroughs' death, at $3,452.03 per share, or a total amount of $604,105.31. The assets of the petitioner were and are diversified, consisting principally of stocks, including at the time of Burroughs' death stock in a corporation which owned a sugar *1168 plantation in Mexico, bonds, both foreign and domestic, and extensive timber lands in North Carolina and Georgia.
17. The executor directed its efforts to the prompt liquidation of the petitioner, but because of many difficulties encountered and the intricate problems of estate and trust administration and accounting involved, liquidation was either impossible or inadvisable.
18. The executor and trustee of the Burroughs estate, following the established practices of trust and estate accounting, kept two accounts, a principal account and an income account, in which transactions in the estate were reflected. Because the estate owned the entire issued and outstanding capital stock of the petitioner, the same practice with respect to principal and income accounts was maintained for the petitioner. Profits resulting from the sale of securities owned by the petitioner were credited to the principal account and*846 could not have been distributed to the beneficiaries of the estate.
19. The petitioner reported in its Federal income tax return for the taxable year 1931 a net income of $36,790.56, which was adjusted by the respondent to $39,576.89, and it is on this last figure that the additional tax of 50 percent was computed by the respondent under section 104 of the Revenue Act of 1928. The net income for 1931 included net profits of $29,585.10 arising from the sale of securities.
20. All of the loans made by the petitioner to the estate during the year 1931 in the aggregate amount of $47,500 were made from the principal account of the petitioner, no part of which could have been distributed to the beneficiaries of the estate.
21. All of the loans or advances above referred to were shown in the accounting filed by the executor of the estate of Burroughs in the Surrogate's Court for the County of Westchester, at White Plains, New York, and under a decree entered by the Surrogate on July 1, 1932, was specifically approved as valid and subsisting obligations of the estate.
22. There was no plan or scheme on the part of those charged with the administration of the affairs of the*847 estate and of the petitioner to evade the payment of surtax or any other form of tax.
23. If the net income of the petitioner for 1931 in the amount of $39,576.89 had been distributed to the estate of Burroughs, the additional tax which would have become payable by the estate would have amounted to approximately $603.98.
24. Burroughs left a gross estate of approximately $4,700,000.
OPINION.
SMITH: The respondent has determined that the petitioner is subject to tax under section 104 of the Revenue Act of 1928 for *1169 the year 1931. This section of the statute reads in material part as follows:
(a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and*848 subject to the same provisions of law, including penalties, as that tax.
(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.
* * *
(d) The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. Any amount so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of the earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his distributive share, be exempt from tax in the amount of the share so included.
The petitioner bases its claim that it is not subject to the tax imposed by section 104(a) of the Revenue Act of 1928 upon the ground that there was no thought in the mind of the officers of the City Bank Farmers Trust*849 Co. to prevent the imposition of the surtax upon the estate of Burroughs, the petitioner's sole stockholder, "through the medium of permitting its gains and profits to accumulate instead of being divided or distributed", and that it was not availed of for that purpose in 1931. It submits that the accounts of the estate of Burroughs for 1931 showed a loss; that if the profits of the petitioner for 1931 in the amount of $39,576.89 had been distributed to the estate, the estate would have been subject to an income tax for 1931 of only approximately $603.98; that under the will of Burroughs the net income of the estate was distributable to the beneficiaries; and that the net income of the estate shown on form 1041 for 1931 in the amount of $132,424.18 was distributable and taxable to the beneficiaries.
It should be noted that under section 104(a) of the Revenue Act of 1928 the tax therein imposed does not apply unless the corporation "is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed."
*850 *1170 In , we said:
But the taxes under these statutory provisions are not imposed because of effects; avoidance per se is not prohibited. It is the purpose, the intention motivating a course of conduct, which is made controlling by the very words of the statute. Unless the purpose was to prevent the imposition of surtaxes, the tax may not be imposed. * * *
In , the court stated:
* * * A statute which stands on the footing of the participants' state of mind may need the support of presumption, indeed be practically unenforceable without it, but the test remains the state of mind itself, and the presumption does no more than make the taxpayer show his hand. (C.C.A. 2); (C.C.A. 2).
In (Dist. Ct., W. Dist. Ky.), in construing section 220 of the Revenue Act of 1926, which is similar to section*851 104 of the Revenue Act of 1928, the court said:
A careful study of section 220 discloses that before there can be an assessment under its provisions, in a case such as the one presented here, there must be not only an accumulation of gains and profits beyond the reasonable business needs of the corporation, but such accumulation must have been permitted by the corporation with the intention and for the purpose of enabling its stockholders to evade the payment of surtaxes on dividends which otherwise would have been distributed to them. Even if it should clearly appear that the accumulations were in excess of the reasonable needs of the corporate business, section 220 would not apply unless it further appears that the accumulations were intentionally permitted for the express purpose of enabling the stockholders to evade the surtax. It is true the statute provides that the certificate of the Commissioner that in his opinion the accumulations are unreasonable for the purposes of the business is prima facie evidence of a purpose to evade the tax; but in a suit for a refund of taxes collected under this section, the plaintiff always had the right to overcome this prima facie*852 presumption by proof. This, it seems to me, the plaintiff has successfully done * * *. [Italics supplied.]
The evidence in this proceeding is conclusive to the effect that the failure of the petitioner to distribute its earnings to its sole stockholder, the estate of Burroughs, during 1931 was not due to any purpose to evade the payment of surtax. The estate showed a considerable loss for the taxable year in question. In the absence of the purpose of preventing the imposition of the surtax upon its stockholder through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, the extraordinary tax imposed by section 104(a) of the Revenue Act of 1928 does not apply. The action of the respondent in holding that the tax is assessable and collectible is reversed.
Reviewed by the Board.
Judgment will be entered for the petitioner.